Standard & Poor’s Ratings Services moved quickly to affirm its “A” counterparty credit and financial strength ratings on IPCRe Ltd. and its “A” financial strength rating on IPCRe Europe Ltd. (collectively IPCRe), following the announcement that AIG intends to sell almost all of its stake in the Bermuda-based reinsurer. S&P also affirmed its “BBB+” counterparty credit rating on IPC Holdings Ltd.; however, S&P said its outlook on all of the ratings is negative.
A.M. Best Co. reacted by issuing a statement indicating that the “financial strength rating (FSR) of ‘ A’ (Excellent) and issuer credit ratings (ICR) of ‘a’ for the reinsurance subsidiaries of IPC Holdings Ltd. (IPCRe) remain unchanged.”
Best added: “The sale of IPCRe shares by AIG will not affect IPCRe’s capital structure and should provide it with the ability to better manage its capital and afford greater financial and operational flexibility. This comment applies to IPCRe Limited (Bermuda) and IPCRe Europe Limited (Dublin, Ireland). IPCRe’s ICR of ‘bbb’, the debt rating of ‘bb+” on $236.25 million 7.25 percent mandatory convertible preferred stock and the indicative ratings for all debt securities available under shelf registration remain unchanged. All ratings have a stable outlook.”
S&P commented further: “The ratings on IPCRe reflect the companies’ strong competitive position in the Bermuda reinsurance market as a long-term provider of high-severity, low-frequency property catastrophe coverage; historically very strong (but volatile) operating performances; strong and stable management team; and strong capitalization.”
“We also view IPCRe’s financial flexibility as a strength, highlighted by the group’s ability to raise additional capital following the World Trade Center disaster and the 2005 hurricanes,” indicated S&P credit analyst Jieqiu Fan.
However, S&P said: “These positive factors are partly offset by IPCRe’s narrow business-line focus, low reinsurance utilization that compounds potential volatility, and equity allocation greater than that of many of its peers. The negative outlook reflects the challenges the company faces as a monoline catastrophe reinsurer in an industry with possible exposures to high loss frequency and severity events and our concerns about the industry’s long-term pricing adequacy.
S&P also noted that the negative outlook reflects its “concerns regarding IPCRe’s high risk tolerance and high earnings volatility. If IPCRe’s concentrated risk profile and high risk tolerance lead to lower capital adequacy or operating performance over the next 12 to 24 months,” S&P said it would expect to “lower the ratings–most likely by one notch. Alternatively, if IPCRe’s efforts to improve its portfolio and enhance its risk selection capabilities enable it to meet capital and earnings expectations and achieve appropriate long-term returns, Standard & Poor’s will consider revising the outlook to stable. The ratings on IPCRe reflect its stand-alone characteristics, which–following AIG’s announcement of its intention to sell its shares in IPCRe–are not expected to change immediately but could change over the longer term.”
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